Court: Professional Liability Policy Excludes Patent Claims

June 26, 2009

A professional liability policy does not cover legal fees for patent infringement lawsuits brought by a competing company, a Pennsylvania appeals court has ruled.

The ruling comes in response to a suit brought by Transcore, a company that makes technology for electronic tolling on roadways, against its insurer, Caliber One Indemnity Co.

The suit stemmed from Caliber One’s refusal to pay nearly $825,000 in legal fees spent by TransCore to defend itself in a patent lawsuit brought by a competitor, X-Cyte. X-Cyte alleged that TransCore, formerly known as Amtech, was violating X-Cyte’s patent protections in a system it installed for high-speed tolling.

When notified of the case, Caliber declined to pay the legal fees. Transcore then hired its own lawyers and defended the action in court, ultimately winning the underlying lawsuit brought by X-Cyte.

TransCore then sued Caliber One, claiming the insurer — part of PMA Capital Corp. — improperly declined coverage.

The lower court initially sided with TranScore, finding that the installation of the equipment constituted a professional service, and therefore was covered under the company’s professional liability policy. The lower court also found that exclusions in the policy made no mention of patent infringement, meaning that coverage was available.

However, on appeal, the Superior Court found that a professional liability policy is not designed for claims brought by third parties, such as contract or patent infringement claims. Professional liability, the court said, encompasses claims made by entities that have a professional relationship with the insured. By definition, the court ruled, competitors are not counted among that group.

The two companies, X-Cyte and TransCore, “had no relationship whatsoever” and “it would seem self-evident that professional liability insurance is designed to cover those actions undertaken and losses incurred within a professional relationship,” wrote Justice Richard Klein in his opinion.

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